Regulating Natural Monopolies: Electricity
Added on 2020-02-19
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[EXPLAIN HOW AND WHY GOVERNMENTS MAY WANT TO REGULATE THE PRICE SETTING OF A NATURAL MONOPOLY][Year][Type the company name][Type the author name]
INTRODUCTIONNatural monopolies are favorable to businesses wherever the principal providers gain price rewards and have to be synchronized to diminish threats. Theoretically speaking, a natural monopoly is defined by a current in an industry wherein it is the highest supplier but even then has the capability to give a price which is the lowest with the help of economies of scale.Thereby those who are a part of this kind of a monopoly are always exposed towards creationof a higher risk of actual monopoly. However the society tends to gain by regulating these scenarios to even playing the field. Although the general concept is that monopolies are a threat to free market, however some kinds of monopolies such as natural one are either practically of use or almost inescapable. Thereby with the above definitions it seems clear as to why the government is inclined towards regulation of the price setting of a natural monopoly. The said essay discusses the reason and the method of the said regulation. (Source: http://www.economicshelp.org/blog/glossary/natural-monopoly/)HOW GOVERNMENT MAY REGULATE THE PRICE SETTING OF A NATURAL MONOPOLYMonopoly is one type of a market structure which needs regulation and intervention of the government compulsorily as many a times the same may be misused by the businesses for their own benefits thereby conducting the business which is not for the good health of the society as a whole. Hence the government regulates natural monopoly too even though the
same is not as threatening as the other forms of monopoly. Many ways are adopted via which a government may regulate the price setting in a natural monopoly such as price capping by regulators RPI-X, regulation of service quality, merger policies, breaking up a monopoly, yardstick or ‘Rate of Return’ regulation and examination of exploitation of domination command. Various regulatory bodies were formed by the government for fresh privatized industries suchas electricity. OFGEM is the body created for the regulation of electricity. These bodies help to ensure that the price increase is within permissible limits and the same is asked by them to do by the application of a formula names RPI-X wherein X denotes the price by which these industries are required to reduce the prices in real terms. However the said method has various benefits as well as flaws. The advantages amongst them are that th refulator has full authority to fix the increment in the prices with respect to the condition of the industry presently and the expected efficiency savings. Thus if a company reduces the costs more thanX, they would in turn be able to gain more. Another very stark advantage is that of surrogate competition wherein the absence of competition, RPI-X is a method to increment the antagonism and avoid the misuse of the monopoly power. The disadvantages are however also to be taken into account. Firstly, it is quite an expensive affair to decide what would be the level of X. Further there is always a risk of a situation wherein the regulators may becomeinclined towards the favor of the company and thereby allow them to increase profits out of reach. Last but the not the least, the companies are generally found to be unable to maintain the efficiency savings simply because they may become too efficient and in turn be penalizedbecause they possess higher levels of X (economicshelp.org. 2016). Further to this price setting may be regulated by close examination of the kind of service being given by the monopoly such as in the electricity market, the regulators have to ensure that those who are aged are given special treatment such as not allow electricity to cut down the supply in summers. Thirdly, the regulators have full rights to check upon the various mergers which may lead to creation of monopolies, thereby ensuring to interfere and break them or allow them depending upon the kind of merger and the companies involved in the merger. Fourth and one of the most common ones is the breaking up of the existing monopoly when the regulator is of the view that the monopoly concern has become powerful enough to misutilize its powers for the detriment of the people. However the said way of regulation is a rarity as it is taken only in very extreme cases when the monopolist is behaving in an untoward manner thereby harming people (Joskow, 2007).
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